Case Analysis
A brief outline of the firm and its industry is given, as well as a few tips for your attention. You are given three years' worth of income statements and balance sheets to examine.
You are a financial analyst working for an investment firm. This manufacturer has asked for your firm's help in raising capital for the upcoming season's production requirements. It is your job to analyze the financial statements and comment to the investment brokers on this firm's current financial situation. It is late July, and the firm's financial statements (representing the fiscal year ending June 30) have just been released.
For this project you must recreate the attached financial statements on separate worksheets in an Excel workbook. Then, on another worksheet, you must create formulas to calculate the financial ratios that can be derived from the given financial statements. These ratios are to be calculated using formulas in the cells that are linked to the other worksheets: no credit will be given if the ratios are calculated by hand and entered into the cells. You must determine which ratios can be calculated with the information given, based on the ratios given in your textbook. There is enough data for you to calculate liquidity, asset management, leverage, and profitability ratios. You must calculate the Du Pont ratio analysis separately. All three years' worth of ratios must be calculated, and should be presented in chronological order for you to do trend analysis.
Outdoor Sports, Inc.
Outdoor Sports, Inc. is a manufacturer of surfboards, wind surfers, and related equipment. The company was started by two surfers tinkering in their garage with surfboards of their own design. The company has grown rapidly, cashing in on the increasing popularity of wind surfing.
Outdoor Sports' business is highly cyclical. Inventory is built up during the late fall and winter months, and the majority of sales are booked and delivered to distributors during the early spring. Competition among the many manufacturers of this easily made product line is intense. Small manufacturers like Outdoor Sports are under great pressure from major sports equipment makers, who have substantial promotional resources at their disposal, as well as complementary products, countercyclical to the sale of surfing equipment. Brand recognition is an important selling point in this competitive business, achieved at considerable expense through sport personality endorsements and other promotional campaigns.
What to expect from Outdoor Sports' financials depends on when they are examined during the fiscal year. At June 30, the company's fiscal year-end, the financials should look most favorable. Receivables, inventory, payables, and working capital borrowings should be at seasonal lows. The firm should be cash rich, as it is about to gear up for the next season's production run. Property, plant and equipment should be at some significant level commensurate with the company's manufacturing demands, supported by equity and long-term debt.
Sales margins bear close watching. Pricing pressures caused by intense competition can erode them to dangerously low levels. Given the seasonality of the business, there may be a cash flow crunch during the winter months. Overall, cash flow may be a problem if the business is still growing rapidly, and requires outside financial resources to do so.
The potential of overproducing during the winter period for a spring sales period that fails to live up to management's expectations is also a significant risk.
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OUTDOOR SPORTS, INC.
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Balance Sheet ($000s)
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June 30, 2011
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2009
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2010
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2011
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ASSETS
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Current Assets
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Cash
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182
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25
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30
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Accounts Receivable
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338
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391
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349
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Inventory
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283
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831
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1,207
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Prepaid Expenses
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63
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33
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11
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Other Current Assets
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11
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8
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3
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Total Current Assets
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877
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1,287
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1,601
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Propert, Plant & Equipment
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Land, Buildings & Equipment
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842
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842
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941
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Less Accumulated Depreciation
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179
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226
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286
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Net land, Buildings & Equipment
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663
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616
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655
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Total Assets
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$ 1,540
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$ 1,903
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$ 2,255
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LIABILITIES
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Accounts Payable, Trade
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129
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283
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347
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Accounts Payable, Other
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80
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52
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61
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Accrued Expenses
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0
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0
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0
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Short-Term Debt
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184
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413
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745
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Income Tax Payable
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61
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0
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0
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Total Current Liabilities
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454
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748
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1,152
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Long-Term Debt
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578
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682
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869
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Total Liabilities
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1,031
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1,430
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2,021
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Stockholders' Equity
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Capital Stock
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275
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275
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275
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Retained Earnings
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234
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198
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(41)
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Total Stockholders' Equity
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509
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473
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234
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Total Liabilities and Equity
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$ 1,540
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$ 1,903
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$ 2,255
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Outdoor Sports, Inc.
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Income Statement ($000s)
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June 30, 2011
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2009
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2010
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2011
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Sales
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2,519
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4,914
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6,185
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Cost of Goods Sold
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1,460
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2,899
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4,172
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Gross Income
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1,059
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2,016
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2,013
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Operating Expenses
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732
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1,898
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2,060
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Depreciation Expense
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30
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47
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61
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Operating Income (EBIT)
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297
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72
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(107)
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Interest Expense
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72
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107
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132
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Income Tax Expense
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90
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0
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0
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Other Expense
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47
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0
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0
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Net Income
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$ 89
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$ (36)
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$ (239)
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